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Beyond the Maze
HR leaders and outsourcing vendors are often hamstrung by a lack of standards in the outsourcing process. But a solution may be at hand.
Can developing a comprehensive HR outsourcing agreement turn into a project of Biblical proportion? Not quite, but employers and outsourcing vendors agree that outsourcing- contract negotiations often become a Tower of Babel -- an expensive exercise in confusion. With every new HR outsourcing contract negotiation, employers and vendors attempt to define the terms of their relationship, the nature of services and appropriate transactions, and the measurable standards of performance known as "service-level agreements." The result, industry experts say, has been confusion, inconsistency and delay in reaching agreements, not to mention high legal and consulting fees. Though the HR outsourcing industry is more than 20 years old, employers, vendors and industry consultants have only recently begun to compile all of the industry terms, pricing guidelines and performance practices. And the creation of a guide to "best practices," or true industry standards, may still be years away, they say. "Outsourcing has always been about improving service and taking advantage of the economies of scale," says Douglas R. Thomas, managing director of Smart Business Advisory and Consulting in New York. "When the industry began more than 20 years ago with benefits-administration agreements, the services were more easily defined and evaluation of performance more generally understood." But as the industry has grown and matured, the agreements and services sought have become more complex and the level of investment by service providers has increased, he says. As a result, the pressure on the proposal process, contract negotiation and performance evaluation has steadily expanded. "Outsourcing agreements need to be win-win situations, while stakeholders on both sides of the table have to be in complete agreement about the details of their relationship," says Thomas. A Critical Need Linda Merritt, who recently retired as HR director at San Antonio-based AT&T, serves as chairwoman of the Washington-based HR Outsourcing Association's Research and Standards Committee and was a founding member of the Large Market HRO buyers group, an industry group comprised of employers and vendors. She says the need for standards has become critical. "I think it's no secret that a large multi-process HRO deal requires significant time, effort and money to go from [request-for-proposal] to a signed contract," she says. And while employers foot the bill for services once an agreement is reached, both buyers and vendors are forced to struggle with the cost of the contract- development and marketing process. "Vendors cannot afford to chase every possible HRO deal," she says. "The time and effort to get each deal must be structured into their cost of doing business, which puts pressure on pricing for buyers and profitability for providers. Buyers want many benefits from HRO -- and cost savings are key. But the time and cost required to get to a signed contract detract from the value of the deal." Confusion about definitions, pricing terms and service-level agreements drag out the process and ratchet up the level of tension during negotiations, she says. "If contention creeps in over the basics, like how to define the pricing and measure the performance of the services to be outsourced, it is not only money that will be lost," says Merritt. "Focus will be lost on what is truly important -- achieving the full value of outsourcing." Lowell Williams, the executive director of HR Advisory Services at EquaTerra >, an outsourcing advisory company in Houston, agrees. "Some HR outsourcing projects can take nine to 12 months to be completed, as employers and their vendors have to reinvent their terms and conditions, pricing models and SLAs each time," he says. "This is a real business problem that needs to be solved." However, Williams believes the solution lies with an industrywide effort to create some standardization for parts of the request-for-proposal and contract process. "While most HR outsourcing agreements include some common basics, such as the providing of payroll services and employee benefits administration, generally the scope ofservices defined in an outsourcing agreement is highly tailored to the needs and strategies of the employer," he says. But terms and conditions, pricing methodologies and some of the basic SLAs have become generally accepted. These can provide the foundation for industry-wide standardization, he says. "Sustainable and Mutually Beneficial" Last year, the standardization effort began in earnest, coming from two distinct industry directions. The first attempt was a vendor working group, OpenDoorHRO, which was founded early last year by international outsourcing firm ARINSO in Brussels, Belgium; global software firm SAP Inc. in Walldorf, Germany; and < EquaTerra >. (SAP, the world's largest provider of enterprise software platforms, counts many of the large HRO providers as its clients.) The partners established a Web site and the group began discussing sets of common terms and practices for projects. The Web site includes a content library that offers white papers on outsourcing, standardized contract specifications, and documents and templates for HR outsourcing projects. "We wanted our work to be completely open to the public for comments and contributions, and we invited the whole industry to participate in our research," says Williams. "We also hope that our Web site could become a resource for HR professionals to educate themselves about outsourcing as they begin their involvements with the process." At about the same time, the HROA began convening meetings of its Large Buyer Committee, led by Merritt, to discuss a similar set of needs, but focusing more directly on researching and recognizing what employers and their outsourcing vendors have already resolved in their existing agreements. "Even though the HRO marketplace is still fairly young, there is a growing base of experience across many deals and vendors," says Merritt. "That is why we are starting with establishing peer-reviewed HROA practices -- what is in use now that works." Working separately, the two organizations began gathering sample contracts, terms and language, along with input from corporate buyers, vendors, lawyers and consultants who have provided guidance for outsourcing projects. OpenDoorHRO, which includes HROA members, merged its activities with the HROA in November, donating its online data collection and providing ongoing expertise to the HROA project. "Our ambition with the OpenDoorHRO initiative was to foster more sustainable and mutually beneficial HRO engagements by providing free access to proven, thought-leading best practices as pragmatic inputs for BPO-decision cycles," says Christian Baader, SAP's vice president of business process outsourcing strategy and one of the founders of OpenDoorHRO. The merged initiative "clearly provides added value to HRO buyers and suppliers by driving the sustainability of the whole industry," he says. < EquaTerra's Williams agrees. "The interest has been tremendous, signaling a need among the buyer community for impartial and ready-to-use documents and guidelines." Merritt says the goal of the combined study group is to create a set of guidelines for pricing methodology and service agreements, which are expected to be published this spring. "We are blending all of our [combined] knowledge, experience and examples, including the public feedback we gathered, into these guidelines," she says. "We will all benefit from making the process faster and easier." Richard Crespin, executive director of HROA, says the organization has taken a solid first step with a discussion draft of proposed practices posted on the association's Web site. The discussion draft also defines key employee classes and identifies the range of HR outsourcing activities subject to each methodology, including workforce administration, human capital management, compensation, recruitment and staffing, employee mobility, payroll, absence management, learning management, performance management and benefits. The service-level matrix draft provides general guidelines for the ways in which employers use SLAs to establish both minimum and maximum levels of service, priorities, reporting periods and analysis for reasons of service-level failure and defaults. The draft notes that contracts generally specify about 13 percent of monthly fees as "at risk" for enforcement of SLA standards. The draft also provides specific and detailed examples of expected service levels for hours of operation for the call center, automated voice response, average speed-to-answer, case management and contact resolution, among other performance activities. For example, the proposed practices call for credits against the base fee if call centers and Web-based information centers are not open 24/7. The performance standard could be expressed by a ratio of the number of hours a call center or Web site is in actual operation divided by the number of promised hours of operation, with the understanding that vendors should perform at least 99.9 percent of the promised service. The proposed SLAs also set actual standards for the response speed of call centers. For example, call centers are expected to answer 85 percent of calls within 30 seconds and be held to a minimum response of 80 percent of calls in 30 seconds, or provide a credit against the HRO fee. Long-Term Goals Crespin says HROA is currently reviewing the posted practices and comments gathered from the organization's members and the HR outsourcing community at-large and is on track to post revised practice guidelines later this year. He declined to elaborate on the comments received thus far, adding that the organization will not release any information on the updates until the committee has reviewed all of the comments. However, Crespin cautions that work so far has not yet yielded any "best practices" or final mutually-agreed-upon industry standards. "Our first step is to establish industry practices, to identify what is actually going on out there and what seems to be consistent in terms of language and contracted activities," he says. "Then we can address what is actually best practice or beyond." Merritt says the project has both short-term and long-term benefits. "We believe there are benefits for everyone in the community and that our work will help the HRO marketplace grow and mature," she says. Buyers, she notes, have already begun to realize that the customization they ask for ends up driving greater costs into their outsourcing agreements and that they will benefit economically from some consistency. "Sure, many vendors will do it 'your way,' but why pay for customization in areas that do not add business value?" While some vendors may perceive greater transparency as a threat to their unique capabilities, greater clarity into what is standard "allows focus on the vendor's competitive advantages and how decisions on people, processes and technology impact both the cost and the overall value of the deal," Merritt says. The widespread acceptance of standards may also help the industry evolve more quickly. "When we first started outsourcing human resource functions, our service methodology and service-level agreements were pretty basic -- and they haven't evolved all that much," she says. "It was all quantification of call-center performance and participant surveys. "Now we are beginning to move toward more qualitative SLAs as we try to better understand and improve the quality of our participant experience," she says. "As we finally come to an agreement on the basics, we can start devoting more time and resources to greater sophistication." With greater standardization, says Merritt, HR leaders will be able to spend more time devising SLAs and reports that will provide more strategic information about quality, and less time policing actual HRO performance. They'll also be able to devote more time to the sort of strategic activities that HR outsourcing was originally supposed to have enabled. March 16, 2008 Copyright 2008© LRP Publications |
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© Copyright 2012 LRP Publications. All rights reserved.
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